Redundancy: a distinct category with its own tax treatment

Zambian law distinguishes between several kinds of termination, and the distinction has both legal and tax consequences.

Severance pay

Under the Employment Code, severance pay applies to employees on permanent and certain other contracts. The Act sets out the circumstances and computation.

Casual and temporary employees are not entitled to severance pay.

Redundancy pay

Redundancy is treated as a distinct category, and it carries a significant advantage: a substantial income tax exemption, reported at K2,000,000.

That exemption does not attach to every terminal payment. It makes the characterisation of a termination financially material.

Why the label matters

If a role genuinely ceases to exist and the termination is a redundancy, describing it as something else may cost you the exemption.

Equally, if a dismissal is dressed up as redundancy to avoid a proper process, that is challengeable.

It is worth being clear in writing about the stated reason for termination.

The gratuity interaction

Where you are on a long-term contract, the 25% gratuity under section 73(1) applies at the end of the contract period.

Where an approved pension scheme operates, retirement benefits are paid under that scheme instead.

Notice

Statutory notice ranges from one week to three months depending on length of service. Where notice is not served by either party, compensation equivalent to salary for that period is due.

Before you accept a settlement

1. Confirm the stated reason for termination in writing
2. Check whether you fall under the Code — contracted after 9 May 2019
3. Verify your contract category
4. Check that gratuity is on basic pay at not less than 25%
5. Check the tax treatment applied to each component

Where to go

The Labour Officer for your district, under the Ministry of Labour and Social Security. The Zambia Revenue Authority is the reference on the tax treatment of each component.